Amazon.com (AMZN)

Amazon stock is obscenely overpriced. Although the stock has fallen since its run up in June 2007, its P/E ratio currently exceed that of almost all major internet companies. Profits are growing, sure, but there is very little rational about current price levels

One year ago Amazon began its rally to $100. Y/Y margins showed improvement and bears like the author got squeezed badly. The stock climbed for three consecutive quarters as the street believed margins were growing. But are margins really improving? Last quarter, Amazon operating margins reversed course again and so did the stock price. Amazon's share price is highly correlated with its operating margins.

Current midpoint guidance expects 1Q08 revenue to be $4.05B and operating income of $177M. This Yields an operating margin of 4.4% -- forty basis points lower than the year-earlier period and the lowest first quarter numbers in recent history.

Expect Amazon.com margins to be pressured again and expect the share price for follow suit.

Amazon can be ripe for a real free-fall if, for any reason, one of its business segments doesn't work out because the company shells out a of money each quarter.

The Amazon Prime program is hemmoraging money. The mixture of low prices and offering expensive shipping promotions have created unhealthy long term margin prospects.

No one will be buying CDs or DVDs 5 years from now, and these are a major component of Amazon's earnings. While Amazon is pouring resources into its downloadable media service, they will have to fight an uphill battle for this market, as Apple's iTunes currently dominates.